In Re Merrill Lynch 12 07 2010

Case 1:09-cv-06770-LAP Document 60 Filed 12/07/10 Page 1 of 43
UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK
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In re Merrill Lynch Auction Rate : 09 MD 2030 (LAP)
Securities Litigation : Amended Opinion & Order
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This document relates to :
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No. 09 Civ. 5404 (LAP) :
No. 09 Civ. 6770 (LAP) :
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LORETTA A. PRESKA, Chief United States District Judge:
In this case, Plaintiffs, Louisiana Stadium and Exposition
District (“LSED”) and the State of Louisiana (collectively
“Plaintiffs”), allege ten causes of action against Defendants
Merrill Lynch, Pierce, Fenner & Smith, Inc. (“MLPFS”) and
Merrill Lynch & Co., Inc., (“Merrill”) (collectively
“Defendants”) related to Plaintiffs’ auction rate securities
(“ARS”) issuance. On February 8, 2010, Defendants filed a
motion for judgment on the pleadings against Plaintiffs. The
motion is GRANTED in part and DENIED in part.
I. BACKGROUND
A. The Parties
LSED is a subdivision of the State of Louisiana, with
offices located in New Orleans, Louisiana. (See Third Amended
and Supplemental Complaint ¶ 15 (“Compl.”).) LSED owns the
Louisiana Superdome, and the State is the lessee of the
Superdome. (Id. ¶¶ 15-16.) When LSED’s expenses exceed its
revenues, the State “funds the . . . shortfall.” (Id. ¶ 16.)

Defendant MLPFS is a Delaware corporation with its
principal place of business in New York. MLPFS is a subsidiary
of Merrill and provides, among other things, underwriting and
brokerage services. (See id. ¶ 17; see also Memorandum of Law
in Support of Defendants Merrill Lynch & Co., Inc. and Merrill
Lynch, Pierce Fenner & Smith Incorporated’s Motion for Judgment
on the Pleadings (“Defs. Mem.”) at 16.) Defendant Merrill is
also a Delaware corporation with its principal place of business
in New York and is the parent company of MLPFS. (See Compl.
¶ 19.)
B. Auction Rate Securities
The following facts are recited as alleged in the complaint
and are regarded as true in considering this motion for judgment
on the pleadings. See Hayden v. Paterson, 594 F.3d 150, 160 (2d
Cir. 2010). All reasonable inferences are drawn in favor of the
plaintiff. Id.; see Ashcroft v. Iqbal, ___ U.S. ___, ___, 129
S. Ct. 1937, 1949-50 (2009).
ARS are long-term variable-rate debt instruments that are
traded at periodic Dutch auctions, which are normally held every
seven, fourteen, twenty-eight, or thirty-five days. (Compl.
¶¶ 6-7.) At a Dutch auction, buy orders are entered at interest
rates selected by the bidder. (Id. ¶ 5.) Orders to buy or sell
ARS at an auction can only be placed through a designated
broker-dealer. (Id. ¶ 6.) The broker-dealers collect the
2
orders and forward them to an auction agent who administers the
Dutch auction. (Id.)
These auctions dictate the interest rates payable on the
ARS. (Id. ¶ 5.) Each bid, or buy order, is ranked by the
auction agent from lowest to highest based on the interest rate
of the bid. (See id.) The orders are filled beginning with the
lowest interest rate, followed by orders with progressively
higher interest rates, until all instruments available for sale
are matched up with purchase orders. (See id.) The lowest
interest rate at which all the ARS available at the auction are
sold becomes the “clearing rate.” (See id.) Interest rates for
the entire ARS issuance up for auction are set to the clearing
rate following an auction. (See id.) If, at a particular
auction, the buy and sell orders are insufficient to purchase
all of the ARS offered for sale, the auction fails. (Id. ¶ 7.)
In the event of an auction failure, ARS holders are unable to
sell the securities that they hold, and the interest rate on the
ARS rises to the maximum rate (or failure rate) of approximately
12% until the next auction. (Id.) By February 2008, the ARS
market had grown to approximately $330 billion in outstanding
securities. (Id. ¶ 8.)
C. The Solicitation and Agreement
In early 2005, LSED sought to restructure its existing
debt. (See id. ¶ 28.) Subsequently, LSED issued a
3
“Solicitation for Offers for Senior Managing Underwriter” (the
“Solicitation”) seeking investment banking services. (Id.
¶ 29.) After receiving the Solicitation, MLPFS responded by
submitting a proposal to LSED on April 19, 2005. (See id.
¶ 30.) In its proposal, MLPFS stated, among other things, that
it would “provide a full spectrum of client services . . . in
order to create the most innovative and cost effective financing
program.” (Id.) On May 19, 2005, LSED hired MLPFS to fill the
role of senior managing underwriter and charged it with the task
of designing and implementing a structure for refinancing LSED’s
debt associated with the Louisiana Superdome. (See id. ¶ 37;
Plaintiffs’ Memorandum of Law in Opposition to Merrill Lynch’s
Motion for Judgment on the Pleadings (“Pls. Mem.”) at 1; Defs.
Mem. at 3.)
After the parties reviewed various financing options, MLPFS
recommended the ARS structure to LSED. (See Compl. ¶ 43.)
MLPFS proposed a “synthetic fixed rate structure” for the ARS,
which would convert LSED’s variable rate payments as set by the
auctions into fixed obligations (created by interest rate swap
agreements and a credit enhancement in the form of bond
insurance). (Id.) According to MLPFS, the ARS structure it
recommended would allow LSED to meet its financing objectives
with a synthetic fixed interest rate of under 5%. (Id. ¶ 55.)
To illustrate how the proposed ARS structure would work, MLPFS
4
supplied LSED with a number of debt service schedules that
showed how LSED’s payments would unfold over the refinancing
period. (See id. ¶¶ 43-56.) LSED claims that it relied on
these schedules when determining whether to follow MLPFS’s
recommendation to issue ARS. (See id. ¶ 59.) Accordingly, on
March 23, 2006, based on MPLFS’s recommendations, LSED issued
three series of ARS bonds: Series 2006A, 2006B, and 2006C.1 (Id.
¶ 62.)
The bonds were issued in “auction mode,” meaning that the
rate of interest was set by way of the auction procedure
outlined above. (Id. ¶ 66.) However, they could be converted
to traditional fixed- or variable-rate “modes” until at least
January 30, 2008.2 (Id. ¶¶ 66, 113.) Plaintiffs allege that
MLPFS undertook a duty to provide LSED with advice about whether
1
“The Series 2006A bonds were issued in an aggregate principal
amount of $84,675,000 with an initial interest rate of 3.10%,
and an initial auction period starting April 4, 2006.” (Compl.
¶ 63.) “The Series 2006B bonds were issued in an aggregate
principal amount of $84,650,000 with an initial interest rate of
3.10%, and an initial auction period starting April 5, 2006.”
(Id. ¶ 64.) “The Series 2006C bonds were issued in an aggregate
principal amount of $69,150,000 with an initial interest rate of
4.70%, and an initial auction period starting April 17, 2006.”
(Id. ¶ 65.)
2
Defendants state that LSED had this conversion option until
January 30, 2008. (Defs. Reply Mem. at 2.) It is not clear
from the record whether the option contractually expired or
simply became economically unfeasible at that time. The issue
is immaterial because LSED had over a year to convert following
the August Disclosure.
5
to convert the bonds to another “mode” by which the bonds’
interest rates were set. (Id. ¶ 140.)
In addition to serving as lead underwriter, MLPFS served as
the broker-dealer for the auctions pursuant to another agreement
between the parties (the “Broker-Dealer Agreement”). (See id.
¶ 71; Defs. Mem. at 7-8.) Under the Broker-Dealer Agreement,
MLPFS earned approximately $644,000 in addition to its other
compensation earned between the issuance of the ARS and the
auction failures in February 2008. (Compl. ¶ 71.)
D. Merrill Lynch’s Role as a Bidder
Plaintiffs allege that MLPFS failed to disclose its bidding
practices in the ARS market. LSED’s central allegation is that
the operation of the recommended ARS structure entirely depended
on MLFPS’s placing support bids3 at every auction for which it
was the sole or lead underwriter/broker-dealer. (See id. ¶¶ 91-
92, 108; see Pls. Mem. at 7, 9.) Support bids ensured that all
the ARS for sale in any given auction would be purchased and
thus the auction would not fail. (Compl. ¶ 91.) Absent support
bids, LSED could not have obtained the low interest rates
promised by MLPFS because the auctions would have otherwise
failed, causing LSED to pay the failure rate of 12%. (See id.
¶ 48; Pls. Mem. at 7-8.)
3
“Support bids” are bids placed to ensure that the entire issue
of ARS in a given auction is purchased. (Compl. ¶ 11; see also
id. at ¶¶ 91, 106.)
6
MLPFS’s policy of placing support bids in every auction to
prevent auction failures allegedly created a false impression of
liquidity in the ARS market. (See Compl. ¶¶ 96-97.) From
January 3, 2006, to May 27, 2008, 5,892 auctions throughout the
ARS market would have failed but for MLPFS’s support bids. (Id.
¶ 96; Pls. Mem. at 7.) Cumulatively, approximately 69% of the
auctions for LSED’s ARS would have failed but for MLPFS’s
support bids. (Compl. ¶ 96.) As it relates to LSED’s ARS,
Plaintiffs allege that MLPFS submitted a bid for 100% of LSED’s
bonds in 100% of the auctions to ensure no failures, and MLPFS’s
bids set the clearing rate in nearly every auction. (Id. ¶ 91.)
Specifically, Plaintiffs allege that 76 of 98 Series 2006A
auctions, 72 of 97 Series 2006B auctions, and 46 of 86 Series
2006C auctions would have failed without support bids. (Id.
¶ 93-95.) Furthermore, MLPFS’s support bids set the clearing
rate in all but 5, 5, and 16 of those auctions, respectively.
LSED claims it did not learn any of this until the auctions
failed. (Id. ¶ 91.)
E. The 2006 SEC Order and Merrill Lynch’s Website

Disclosure
On May 31, 2006, following an investigation into the
auction practices and procedures of numerous investment banks,
including MLPFS, the Securities and Exchange Commission (“SEC”)
issued an “Order Instituting Administrative and Cease-and Desist
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Proceedings, Making Findings, and Imposing Remedial Sanctions
and a Cease-and-Desist Order Pursuant to Section 8A of the
Securities Act of 1933 and Section 15(b) of the Securities
Exchange Act of 1934” (the “SEC Order”). (See id. ¶ 100; see
also Defs. Mem. at 10.) The SEC Order stated that various
investment banks intervened in auctions for a variety of
reasons, such as bidding to prevent auction failures or to
affect the auctions’ clearing rates, without proper disclosure.
(See Compl. ¶ 101.) The SEC Order listed MLPFS as a respondent
and noted that each and every respondent engaged in violative
activity with respect to ARS practices. (SEC Order at 2-3.)
The order created two tiers for penalty purposes, the first of
which received larger penalties in part because those
respondents “engaged in more types of violative practices.”
(Id. at 9.) MLPFS was placed in the first tier. (Id.) The
SEC determined that without proper disclosure, these types of
conduct violated the prohibition on material misstatements and
omissions in the offer and sale of securities. (See id. at 3;
Compl. ¶ 101.) The order did not prohibit broker-dealers from
bidding for their own accounts when properly disclosed. (SEC
Order at 6 n.6.) Pursuant to the SEC Order, MLPFS entered into
an agreement with the SEC in which MLPFS agreed, among other
things, to post on its website a written description of its
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auction practices and procedures that would be available to all
issuers of ARS.4 (See id. at 9-11; Compl. ¶ 103.)
In compliance with the settlement, in August 2006, MLPFS
posted a twenty-three page document on its website entitled
“Description of Merrill Lynch’s Auction Rate Practices and
Procedures” (the “August Disclosure”). (See Compl. ¶ 103.)
MLPFS’s website posting disclosed, among other things, that
MLPFS “may routinely place one or more bids in an auction for
its own account . . . to prevent an auction failure.” (Id.)
The posting further stated that MLPFS “may submit a bid in an
auction to keep it from failing, but it is not obligated to do
so.” (August Disclosure at 18.) Finally, the website posting
warned of the risk of an auction failure, stating, “[i]f
sufficient bids have not been made, auction failure results, and
holders that have submitted sell orders will not be able to sell
in the auction all, and may not be able to sell any, of the
securities subject to such submitted sell orders.” (Id.)
Both the August Disclosure and the SEC Order are
incorporated by reference in the complaint and therefore may be
considered in resolving this motion. Chambers v. Time Warner,
Inc., 282 F.3d 147, 152 (2d Cir. 2002).
4
Pursuant to the agreement with the SEC, MLPFS also agreed to
be censured and to pay a civil penalty of $1,500,000. (See
Compl. ¶ 102; SEC Order at 9.)
9
F. The Collapse of the ARS Market
From March 2006 until February 2008, the auctions
functioned as MLPFS had predicted. (See Compl. ¶ 108; see Pls.
Mem. at 8.) But on February 13, 2008, a wave of auction
failures resulted in the collapse of the ARS market;
consequently, LSED’s interest rate climbed to the failed auction
rate of 12%. (See Compl. ¶ 108.)
G. Procedural Background
LSED filed this suit in the Eastern District of Louisiana
on January 22, 2009. See Complaint, La. Stadium & Exposition
Dist. v. Fin. Guar. Ins. Co., No. 09 Civ. 235 (E.D. La. Jan. 22,
2009). On June 10, 2009, the United States Panel on
Multidistrict Litigation transferred this action here for
inclusion in coordinated or consolidated pretrial proceedings
pursuant to 28 U.S.C. § 1407. LSED filed a second amended
complaint on September 30, 2009. After the Defendants sent LSED
letters detailing perceived deficiencies in the second amended
complaint, LSED filed a third amended complaint on December 10,
2009. On February 8, 2010, Defendants filed a motion for
judgment on the pleadings. See Fed. R. Civ. P. 12(c).
“The standard for addressing a Rule 12(c) motion for
judgment on the pleadings is the same as that for a Rule
12(b)(6) motion to dismiss for failure to state a claim.”
10
Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir. 2006).
The Court so proceeds.
II. STATUTE OF LIMITATIONS ANALYSIS
The Court addresses Defendants’ federal, then state,
statute of limitations arguments below.
A. Federal Claims
i. Legal Standard
A statute of limitations defense may be raised by way of a
motion to dismiss if the defense appears on the face of the
complaint. Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d
406, 425 (2d Cir. 2008). The limitations period for Plaintiffs’
claims under the federal securities laws is governed by 28
U.S.C. § 1658(b), which provides that “a private right of action
that involves a claim of fraud, deceit, manipulation, or
contrivance in contravention of a regulatory requirement
concerning the securities laws . . . may be brought not later
than the earlier of 2 years after the discovery of the facts
constituting the violation or 5 years after such violation.” 28
U.S.C. § 1658(b). The parties agree that the two-year period is
the relevant period here. (Pls. Mem. at 46.) That statute of
limitations “begins to run once the plaintiff did discover or a
reasonably diligent plaintiff would have ‘discover[ed] the facts
constituting the violation’ — whichever comes first.” Merck &
Co. v. Reynolds, ___ U.S. ___, ___, 130 S. Ct. 1784, 1798 (2010)
11
(quoting 28 U.S.C. § 1658(b)(1)). Plaintiffs filed the original
complaint on January 22, 2009, so their claims would be time
barred only if the statute of limitations began to run before
January 22, 2007. (See Pls. Mem. at 46.)
When used in this context, the term “discovery” is often
used as a term of art derived from the “discovery rule,” a
doctrine delaying the accrual of a cause of action until the
plaintiff has or should have uncovered “a complete and present
cause of action.” Merck, 130 S. Ct. at 1793; see Dodds v. Cigna
Sec. Inc., 12 F.3d 346, 350 (2d. Cir. 1993). Although the
“facts constituting the violation” certainly include scienter-
related facts in an action under section 10(b), the Supreme
Court has said “nothing about other facts necessary to support a
private § 10(b) action.” Merck, 130 S. Ct. at 1796.
Nonetheless, a securities-fraud plaintiff must plead – and
ultimately prove – economic loss. See, e.g., Dura Pharm., Inc.
v. Broudo, 544 U.S. 336, 342-46 (2005); In re Omnicom Grp., Inc.
Sec. Litig., 597 F.3d 501, 509-10 (2d Cir. 2010).
ii. Analysis
1. Securities Fraud Claims
Defendants argue that the SEC Order and subsequent August
Disclosure, no later than August 2006, put Plaintiffs on notice
of the “central allegation[s]” in the complaint: “that MLPFS
‘did not disclose and, therefore LSED was also unaware [of]
12
MLPFS’ policy of placing blanket bids in every auction . . . .’”
(Defs. Mem. at 16 (quoting Compl. ¶ 2) (second alteration in
original)). Be that as it may, Defendants cannot overcome a
fatal obstacle. Whether or not Plaintiffs could have discovered
the other facts constituting the alleged violation within the
relevant time period, Plaintiffs suffered no economic loss prior
to the collapse of the ARS market in February 2008 according to
the allegations in the complaint. The Plaintiffs’ securities
fraud claims therefore could not have accrued before that time.
See Dura, 544 U.S. at 342-46; Omnicom, 597 F.3d at 509-10. And
it would be fundamentally unfair to run the statute of
limitations from a time prior to when “a complete and present
cause of action” can accrue. See Merck, 130 S. Ct. at 1793;
Lentell v. Merrill Lynch & Co., 396 F.3d 161, 168 (2d Cir. 2005)
(“[T]he applicable statute of limitations should not precipitate
groundless or premature suits by requiring plaintiffs to file
suit before than can discover with the exercise of reasonable
diligence the necessary facts to support their claims.”
(internal quotation marks omitted)). Consequently, the federal
claims filed on January 22, 2009, are timely.
Defendants argue that Plaintiffs “could have brought suit
seeking compensation for the difference in the market value of
their debt based on the purportedly different risk that they
faced.” (Defs. Mem. at 11.) While that proposition could be
13
true in the abstract, it belies the reality here. First of all,
from an issuer perspective, any loss on the “market value” of
debt is relevant primarily insofar as it relates to the pricing
of the initial transaction between the issuer and underwriter –
here, MLPFS.5 An allegation of the type of loss suggested by
Defendants would be essentially immaterial in light of the facts
here, where LSED received the negotiated “full value” (Pls. Mem.
at 50) for its bonds from MLPFS. Secondly — and more
importantly — this argument misses the point of this action.
The relevant alleged economic harm here is increased debt
service payments in the wake of auction failures. (Compl. ¶¶ 4,
199.) The central allegation is that MLPFS submitted bids in
100% of LSED’s auctions and thereby prevented otherwise
inevitable auction failures. (Id. ¶ 91.) Therefore, according
to the complaint, only when MLPFS decided to stop supporting
these auctions could LSED have suffered an economic loss.6 That
occurred in February 2008, well after January 22, 2007.
Defendants, which allegedly controlled when Plaintiffs’ loss
occurred, cannot suggest that Plaintiffs somehow could have
5
LSED makes no allegation that it repurchased any of its debt at
an artificially high price.
6
The complaint contains no allegation that the market set
increased interest rates in the wake of MLPFS’s disclosures.
Indeed, the complaint suggests the opposite: because of MLPFS’s
pervasive intervention, rates remained artificially stable.
14
obtained a fully accrued cause of action prior to Defendants’
exercise of this power.
B. State-Law Claims
i. Legal Standard
When, as here, a federal district court sits in diversity,
state law governs the timeliness of state-law claims. Diffley
v. Allied-Signal, Inc., 921 F.2d 421, 423 (2d Cir. 1990). In
Louisiana, “[d]elictual actions are subject to a liberative
prescription of one year. This prescription commences to run
from the day injury or damage is sustained.” La. Civ. Code Ann.
art. 3492; Black’s Law Dictionary 492 (9th ed. 2009) (defining
“delict” as a “violation of the law,” particularly “a wrongful
act . . . giving rise to a claim for compensation,” or a tort).
In the vernacular of this Court, actions sounding in tort in
Louisiana are subject to a one-year statute of limitations.
Similarly, actions for “redhibition” (breach of warranty) are
subject to a one-year statute of limitations. See La. Civ. Code
Ann. art. 2534(B); Black’s Law Dictionary 1391 (9th ed. 2009)
(defining redhibition). As the parties agree, Plaintiffs’ state
law causes of action in Counts Two and Three and Eight through
Ten are subject to a one-year statute of limitations.
ii. Analysis
In Louisiana, “[p]rescription does not begin to accrue
until injury or damage is sustained.” Luckett v. Delta
15
Airlines, Inc., 171 F.3d 295, 299 (5th Cir. 1999). Therefore,
as with the federal claims, Plaintiffs’ February 2008 date of
injury is dispositive. This lawsuit was filed on January 22,
2009, which is within one year of the date of the alleged
injury. The statute of limitations does not bar these claims.7
III. PLEADING OF FEDERAL CLAIMS
A. Legal Standard
In assessing a motion to dismiss, the Court must accept all
non-conclusory factual allegations as true and draw all
reasonable inferences in the plaintiff's favor. Goldstein v.
Pataki, 516 F.3d 50, 56 (2d Cir. 2008) (internal quotation
omitted). To survive such a motion, “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Iqbal, 129 S. Ct. at
1949 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). A pleading that offers “labels and conclusions” or “a
formulaic recitation of the elements of a cause of action will
not do.” Twombly, 550 U.S. at 555. “Where a complaint pleads
7
However, claims of damages occurring before the August
Disclosure that are predicated on an alleged conflict of
interest or nondisclosure of the SEC investigation contained in
these counts are time barred. The nondisclosure of the
investigation and the conflict of interest became immediately
apparent when the August Disclosure was released and were
actionable, as to pre-disclosure damages, at that time. See In
re Merrill Lynch ARS Litig., 704 F. Supp. 2d 378, 396 (S.D.N.Y.
2010); Intracoastal Seafood Co. v. Scott, 556 So. 2d 974, 977
(La. Ct. App. 1990).
16
facts that are ‘merely consistent with’ a defendant's liability,
it ‘stops short of the line between possibility and plausibility
of entitlement to relief.’” Iqbal, 129 S. Ct. at 1949 (quoting
Twombly, 550 U.S. at 557) (internal quotation marks omitted).
In securities fraud cases like this one, the complaint also must
meet heightened pleading requirements under Federal Rule of
Civil Procedure 9(b) and the Private Securities Litigation
Reform Act, 15 U.S.C. § 78u-4(b). ATSI Commc’ns, Inc. v. Shaar
Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007).
B. Analysis
The federal claims posit liability (1) for material
misstatements (Count Five), (2) for market manipulation (Count
Six), and (3) under section 20 of the Exchange Act (Count
Seven). Because liability under section 20 is solely derivative
of a primary securities law violation, Dodds, 12 F.3d at 350
n.2, the Court first focuses on the other claims.
To state a misrepresentation claim under Section 10(b) and
Rule 10b-5, Plaintiffs must “allege that the defendant[s] (1)
made misstatements or omissions of material fact, (2) with
scienter, (3) in connection with the purchase or sale of
securities, (4) upon which the plaintiff relied, and (5) that
the Plaintiffs’ reliance was the proximate cause of its injury."
ATSI, 493 F.3d at 105. To make out a market manipulation claim,
the complaint must “allege (1) manipulative acts; (2) damage (3)
17
caused by reliance on an assumption of an efficient market free
of manipulation; (4) scienter; (5) in connection with the
purchase or sale of securities; (6) furthered by the defendant's
use of the mails or any facility of a national securities
exchange.” Id. at 101; see 15 U.S.C. § 78j(b); 17 C.F.R.
§ 240.10b-5.
Because of the specific features of the transaction
involved in this case, the Court’s statute of limitations
analysis, supra Part II, has a spillover effect. Securities
fraud claims require allegations of but-for and proximate cause,
called “loss causation.” Omnicom, 597 F.3d at 510. Plaintiffs
cannot demonstrate that the alleged misstatements and
manipulative conduct were proximate causes of their losses,
which occurred in February 2008. (Pls. Mem. at 50 (“Plaintiffs
suffered no economic harm until February 2008.”).) All the
while after Defendants disclosed their bidding practices and ARS
market risks in August 2006, Plaintiffs retained an option to
convert their ARS to traditional fixed- or variable-rate
instruments but failed to exercise it. In short, Plaintiffs
controlled their own destiny. The Court explains briefly.
The Court of Appeals has refined the definition of
proximate cause in this context.
[A] misstatement or omission is the “proximate cause”

of an investment loss if the risk that caused the loss
was within the zone of risk concealed by the
18
misrepresentations and omissions alleged by a

disappointed investor.
Thus to establish loss causation, a plaintiff
must allege . . . that the subject of the fraudulent
statement or omission was the cause of the actual loss
suffered . . . .
Lentell, 396 F.3d at 173 (second alteration in original)
(internal quotation marks and citations omitted). This concept
applies with equal force in a market manipulation case,
particularly where, as here, the manipulation claim involves
nondisclosure, which “is usually essential to the success of a
manipulative scheme.” Santa Fe Indus., Inc. v. Green, 430 U.S.
462, 477 (1977); see also ATSI, 493 F.3d at 101 (stating that a
manipulation claim requires allegations of damages caused by
reliance on an assumption of an efficient market).
Plaintiffs claim the primary cause of their damages was
that MLPFS was unable or unwilling to continue placing support
bids. (See Compl. ¶¶ 242, 245, 247.) Yet Plaintiffs were
informed of the risks involved in the ARS market, albeit after
they issued the bonds. See In re Merrill Lynch ARS Litig., 704
F. Supp. 2d 378, 392 (S.D.N.Y. 2010). The August Disclosure
revealed information about ARS liquidity and Defendants’ bidding
practices that was at odds with what Plaintiffs allegedly knew
prior to the disclosure. (See August Disclosure at 15-16, 18.)
The risks, even if “concealed” prior to these disclosures, were
no longer “concealed” after them. See Lentell, 396 F.3d at 173.
19
As the Court has explained in a prior opinion in this MDL,
following the SEC Order, Merrill disclosed its bidding
practices.8 Merrill Lynch ARS, 704 F. Supp. 2d at 392. Those
disclosures, made in August 2006, were sufficient to “negate the
Plaintiffs’ claims that Merrill Lynch misled the market into
believing that the price of the securities and the clearing
rates set by the auctions were dictated by the natural interplay
of supply and demand.” Id.; see August Disclosure at 15
(stating that MLPFS is “permitted, but not obligated, to submit
orders in auctions for its own account either as a bidder or a
seller, or both, and routinely does so in its sole discretion”).
The disclosures alerted investors to potential liquidity
problems and auction failures:
There may not always be enough bidders to prevent an

auction from failing in the absence of Merrill Lynch
bidding in the auction for its own account or
encouraging others to bid. Therefore, auction
failures are possible, especially if the issuer’s
credit were to deteriorate, if a market disruption
were to occur or if, for any reason, Merrill Lynch
were unable or unwilling to bid.
(August Disclosure at 18 (emphasis added).) The disclosures
specifically noted that “Merrill Lynch is not obligated to make
a market in the securities, and may discontinue trading the
securities in the secondary market without notice for any reason
8
The fact that MLPFS could bid for its own account generally was
disclosed in the Broker-Dealer Agreement (Defs. Mem. at 20), but
such disclosures were inadequate given the allegations here.
See SEC Order at 3.
20
at any time.” (Id.) Moreover, the August Disclosure specified
that “Merrill Lynch provides no assurance as to the outcome of
any auction.” (Id.) Finally, the disclosures noted that
Defendants possibly had differing interests in bidding and
conducting auctions and that, when bidding for their own
account, they “would likely have an advantage over other
bidders.” (Id. at 15.)
When these very risks were realized, causing auction
failure and sending interest rates to 12%, Plaintiffs cried
foul. However, for over a year following the disclosures, LSED
could have converted its bonds to a different interest rate
structure. Rather than doing so, it was content to pay a lower
interest rate while the ARS market functioned as it had all
along. (Defs. Mem. at 12.) Ultimately, the bet did not pay
off, but that does not amount to securities fraud. Plaintiffs
contend that this ARS case is unique. (Compl. ¶ 3.) That is
true: the specific features of LSED’s ARS issuance inform the
Court’s analysis in this case.
LSED was armed with (1) disclosures about the nature of the
ARS market and MLPFS’s bidding practices and (2) the ability,
for over a year, to avoid entirely the risk of auction failure.
The interplay of these two facts is important. When the
disclosures emerged, LSED, in effect, was presented with a
choice. It could do nothing and accept the newly disclosed
21
risks (along with a more attractive interest rate) or chart a
safer course. LSED chose the former. The risks that
materialized were not then concealed from LSED, Omnicom, 510
F.3d at 513-14; Lentell, 396 F.3d at 173, and it chose to accept
those risks knowing it could opt out. Cf. Bastian v. Petren
Res. Corp., 892 F.2d 680, 682-84 (7th Cir. 1990) (Posner, J.)
(suggesting that investors cannot allege securities fraud when
assuming the risk of the investment). Thus, after the
disclosures were made, LSED assumed the risks of the investment
choices it made, like any other investor.9 See Bastian, 892 F.2d
at 686; see also New Haven Inclusion Cases, 399 U.S. 392, 492
(1970) (“[I]t is a fundamental aspect of our free enterprise
economy that private persons assume the risks attached to their
investments.” (internal quotation marks omitted)).
Plaintiffs therefore cannot assert that the alleged
misstatements and market manipulation caused their losses. See
Omnicom, 597 F.3d at 509-10, 513; Lentell, 396 F.3d at 173;
Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992)
(“[A] plaintiff must show[] that the economic harm that it
suffered occurred as a result of the alleged
misrepresentations.”). To say otherwise would be akin to
9
Indeed, Plaintiffs’ brief acknowledges this reasoning. They
state that it was the “liquidity risk” — of which they were told
by way of the disclosures, see Merrill Lynch ARS, 704 F. Supp.
2d at 392 — that “materialized” (Pls. Mem. at 32).
22
affirming that a sinking ship legally caused a passenger to
drown even if the passenger had ready access to a seaworthy
lifeboat. See Omnicom, 597 F.3d at 513 (“[R]ecovery is limited
to only the foreseeable losses for which the intent of the laws
is served by recovery.” (internal quotation marks omitted)).
Plaintiffs’ contentions to the contrary are unpersuasive.
First, they say that the disclosures were inadequate to disclose
the true nature of the manipulation here. (Pls. Mem. at 33.)
That argument was rejected by this Court in this MDL. Merrill
Lynch ARS, 704 F. Supp. 2d at 392. Second, they say there is no
evidence that the disclosures were made available to them,
meaning that there is no evidence that they made a conscious
choice not to convert the bonds to another “mode.” (Pls. Mem.
at 34.) This conclusion, however, ignores the public record.
Plaintiffs make no assertion that they were unaware of the SEC
Order (see id. at 46; Compl. ¶¶ 100-102), and the August
Disclosure, which the SEC Order required, was equally available
to Plaintiffs. Merrill Lynch ARS, 704 F. Supp. 2d at 397
(stating that these same sources were “widely available” and
“easily accessible”); see Staehr, 547 F.3d at 432. The Court
rejects the suggestion that Plaintiffs were unaware of the
disclosures. Merrill Lynch ARS, 704 F. Supp. 2d at 397.
The most Plaintiffs muster is two arguments about the
conversion option itself. First, they assert that MLPFS’s
23
failure to advise them to convert the ARS’ “mode” was unlawful.
(See Compl. ¶¶ 113, 140, 156.) But that is not a claim under
the securities laws. See Gurary v. Winehouse, 190 F.3d 37, 46
n.9 (2d Cir. 1999); see also Marine Bank v. Weaver, 455 U.S.
551, 556 (1982) (“Congress, in enacting the securities laws, did
not intend to provide a broad federal remedy for all fraud.”).
In any case, following the August Disclosure, it would have been
unreasonable for Plaintiffs to rely on such advice. See In re
Citigroup ARS Litig., 700 F. Supp. 2d 294, 307 (S.D.N.Y. 2009).
Second, they argue in their reply opposition that
converting to another “mode” would have been “enormously
expensive” and suggest that a loss was therefore inevitable.
(Pls. Reply Mem. at 4.) The problem is that Plaintiffs do not
adequately make such an allegation in the complaint. Indeed,
the complaint suggests the opposite: it states that LSED will
have to restructure the debt now, incurring additional costs,
but had it been told of the “problems with the ARS market . . .
prior to the auction failures, Plaintiffs could have effected a
restructure on considerably better terms.” (Compl. ¶ 209.)
And to the extent that such an argument is intimated in the
complaint, it falls short of Rule 9(b)’s requirement that
allegations of fraud be pleaded with particularity. There is no
specific information in the complaint to determine whether
restructuring, at any certain point in time, would have been
24
cheaper or more expensive than the status quo. There is no
allegation that any specific statement was made to induce LSED
to retain the ARS structure. Moreover, LSED issued the bonds
knowing full well the terms and conditions of the conversion
option, which was available to it at any time for any reason.
The complaint also contains little information about what the
market conditions would have dictated in terms of post-
restructure interest rate pricing; what it does contain suggests
that such a conversion would have been economically feasible.
(Id. ¶ 140 (stating that when the bonds were rated AAA,
conversion could have mitigated any exposure to auction failure
rates, but, post-failure, conversion was “no longer
practical”).) Given the “tangle of factors,” Dura, 544 U.S. at
343, that could have affected LSED’s choice not to convert, it
is difficult to see how Plaintiffs have alleged “economic losses
that misrepresentations actually cause[d],” id. at 344. In
short, the thrust of the complaint’s federal allegations is to
claim damages as a result of the failed auctions, not faulty
post-issuance restructuring advice. This argument fails.
To be clear, MLPFS’s disclosures could very well have
presented LSED with a choice it did not want to make.
Nevertheless, the securities laws were not designed to prevent
investment risks from materializing or to provide investment
25
insurance. Omnicom, 597 F.3d at 510, 513 (citing Dura, 544 U.S.
at 345).
That ends this aspect of the discussion. Plaintiffs did
not adequately allege loss causation, so their misstatement and
market manipulation claims (Counts Five and Six) fail. As this
is the third amended complaint, they are dismissed with
prejudice. By extension, that dismissal mandates dismissal of
Count Seven because it is a section 20 claim, dependent on the
existence of a primary violation, which does not exist here.
Dodds, 12 F.3d at 350 & n.2; see ATSI, 493 F.3d at 108.
IV. STATE-LAW CLAIMS
Counts One through Four and Eight through Ten allege state-
law causes of action governed by Louisiana law. Before the
Court analyzes these claims, it addresses Defendants’ argument
that all the state-law claims should be dismissed because
Plaintiffs do not adequately plead loss causation. The Court
rejects this argument. Of course, Louisiana law generally
requires a causal nexus between the alleged unlawful conduct and
the harm, e.g., Keenan v. Donaldson, Lufkin & Jenrette, Inc.,
575 F.3d 483, 491 n.15 (5th Cir. 2009), but Louisiana law
requires no showing of “loss causation” as defined in the
federal securities laws. Indeed, loss causation is a
specialized federal securities law concept. See Lentell, 396
F.3d at 173-74 (stating that analogizing loss causation to the
26
“tort-law concept of proximate cause” is “imperfect”).
Therefore, the Court’s loss causation analysis is not applicable
in wholesale to these state-law claims.
A. Count One: Breach of Fiduciary Duty
Plaintiffs contend that MLPFS owed LSED a fiduciary duty as
its “advisor, underwriter, broker-dealer, and investment banker”
to provide “advice and recommendations regarding the optimal
structure for their debt restructuring.” (Pls. Mem. at 11.)
They claim that this advisory role continued beyond the
issuance. (Id. at 17; Compl. ¶¶ 113-114.)
Under Louisiana law, a breach of fiduciary duty claim
requires proof of (1) the existence of a fiduciary duty, (2) an
action taken by the fiduciary in violation of that duty, and (3)
damages as a result of that action. Omnitech Int’l Inc. v.
Clorox Co., 11 F.3d 1316, 1330 & n.20 (5th Cir. 1994). A mere
contractual relationship is ordinarily insufficient to create a
fiduciary duty. Id. at 1330. Instead, Louisiana law looks to
the actual relationship of the parties and attendant facts and
circumstances. Scheffler v. Adams & Reese, LLP, 950 So. 2d 641,
647 (La. 2007). Because the existence of a fiduciary duty is a
fact-intensive inquiry, dismissal on the pleadings is usually
inappropriate. Better Benefits, Inc. v. Prot. Life Ins. Co.,
No. 03 Civ. 2820, 2004 WL 633730, at *3 (S.D.N.Y. Mar. 30,
2004); see Scheffler, 950 So. 2d at 647.
27
Here, taking the allegations in the complaint as true,
Plaintiffs have alleged sufficient facts to demonstrate the
existence of a fiduciary duty. The complaint alleges that MLPFS
stated in a January 13, 2006, presentation, “The partnership
between Merrill Lynch and LSED goes far beyond executing
transactions.” (Compl. ¶ 46.) In that presentation, MLPFS
stated it would provide “Ongoing Support” in the form of “timely
market valuations and analytics” and help “advise LSED as to the
right structure for the current market” while “[d]escribing
benefits and risks of any transaction . . . for LSED.” (Id.)
The complaint alleges that MLPFS “obligated itself to work as a
partner” with LSED and “to provide advice and recommendations
. . . on the most economically beneficial structure.” (Id.
¶ 37.) The complaint alleges that MLPFS “provided monitoring
and advisory services regarding the bonds . . . after issuance,
including whether to change the mode of issuance” and indicates
that meetings occurred “at least quarterly.” (Id. ¶¶ 38, 113-
115.) LSED alleges that it “relied heavily on the advice and
recommendations of MLPFS.” (Id. ¶ 60.)
While this relationship does not fall within the defined
categories of fiduciary relationships under the Louisiana code,
see Omnitech, 11 F.3d at 1330, the complaint alleges an advisory
relationship beyond the underwriter-issuer contractual
relationship. Courts have considered such a relationship to be
28
a fiduciary one.10 See, e.g., EBC I, Inc. v. Goldman, Sachs &
Co., 832 N.E.2d 26, 31 (N.Y. 2005) (stating that a breach of
fiduciary duty claim may survive dismissal “where the
complaining party sets forth allegations that, apart from the
terms of the contract, the underwriter and issuer created a
relationship of higher trust than would arise from the
underwriting agreement alone”); Breakaway Solutions, Inc. v.
Morgan Stanley & Co., Civ. No. 19522, 2005 WL 3488497, at *2
(Del. Ch. Dec. 8, 2005) (“To the extent that underwriters
function, among other things, as expert advisors to their
clients on market conditions, a fiduciary duty may exist.”).
In an effort to deny that a fiduciary relationship exists,
Defendants first point to a banking statute requiring a written
agreement for a “financial institution” to assume a fiduciary
duty. La. Rev. Stat. Ann. § 6:1124. Defendants overlook,
however, the definition section of that statute, which provides
that a “financial institution” is a “a bank, savings and loan
association, savings bank[], or credit union.” Id. § 6:1121(4).
The statute does not apply here. Defendants also point to
boilerplate disclaimer language appended to the end of two
presentations made by MLPFS to LSED. (Declaration of Scott C.
Musoff Ex. A, at 3 (“[MLPFS is] acting solely in the manner of
10
Louisiana courts apparently have not opined on this question.
(Defs. Mem. at 32.)
29
an arm’s length counterparty and not in the capacity of your
financial advisor or fiduciary.”).) However, several later
presentations (Declaration of Lance C. McCardle Exs. 4, 6-8, 10-
14 & 16) and MLPFS’s original proposal contain no such language,
and, in any event, it is the facts and circumstances of the
relationship of the parties that governs whether a duty existed.
See Scheffler, 950 So. 2d at 647. Given the factual nature of
the question, the Court cannot say as a matter of law that
Plaintiffs have not alleged that a fiduciary relationship
existed.
Plaintiffs also adequately allege a breach of this duty.
They say that Defendants failed to disclose MLPFS’s ubiquitous
support-bidding practices during the proposal phase and failed
to provide Plaintiffs with that information after the issuance.
(Compl. ¶¶ 145, 151-153, 156.) Finally, Plaintiffs argue that
Defendants failed to disclose their conflicts of interest prior
to the issuance. (Id. ¶ 217.) The gravamen of these
allegations is that Plaintiffs issued bonds thinking that
MLPFS’s advice was “optimal” but only later found that what they
were told was not true. (Id. ¶ 212; Pls. Mem. at 16.)
Defendants, in response, rely on their disclosure of their
bidding practices to show that Plaintiffs did not allege any
breach, but Defendants fail to acknowledge that, according to
the complaint, any such disclosure occurred after the bonds were
30
issued. And although Defendants argue that the risks of MLPFS’s
bidding were disclosed at the transaction’s outset, the SEC
Order suggests otherwise. See SEC Order at 3; see also Rombach
v. Chang, 355 F.3d 164, 173 (2d Cir. 2004). Indeed, allowing a
post-issuance disclosure to cure the alleged breach would, pared
to its essence, condone a “bait and switch.” That is not the
province of fiduciary duty law.
Defendants also argue that since any breach sounds in
fraud, the complaint fails to meet Rule 9(b)’s particularity
requirement. This argument also fails. The complaint
references specific presentations made on specific dates by
specific MLPFS employees to LSED. (E.g., Compl. ¶¶ 43-46, 51-
55.) Those presentations form the basis for Plaintiffs’ breach
allegations.
Finally, Plaintiffs allege damages in the form of increased
interest payments and increased expenses for restructuring as a
result. (Id. ¶ 219.) Taking the allegations in the complaint
as true, Plaintiffs allege a claim under Louisiana law for
breach of fiduciary duty.
C. Counts Two and Three: Intentional and Negligent

Misrepresentation and Fraud
In Louisiana, a claim for negligent misrepresentation
requires a showing (1) of “a legal duty on the part of the
defendant to supply correct information; (2) . . . a breach of
31
that duty, which can occur by omission as well as by affirmative
misrepresentation; and (3) [that] the breach must have caused
damages to the plaintiff based on the plaintiff's reasonable
reliance on the misrepresentation.” Keenan, 575 F.3d at 490
n.15. Unsurprisingly, intentional misrepresentation (or, in
Louisiana, “delictual fraud”) requires that a party misrepresent
a material fact with the intent to deceive, causing justifiable
reliance with resultant injury. Murungi v. Tx. Guaranteed, 693
F. Supp. 2d 597, 604 (E.D. La. 2010). Because “[i]ntentional
misrepresentation is essentially fraud” in Louisiana, Solow v.
Heard McElroy & Vestal, L.L.P., 7 So. 3d 1269, 1278 (La. Ct.
App. 2009), the Court’s analysis covers Count Three (fraud) here
as well. Fraud is “a misrepresentation or a suppression of the
truth made with the intention either to obtain an unjust
advantage for one party or to cause a loss or inconvenience to
the other.” Id. (quoting La. Civ. Code Ann. § 1953).
The Court begins with the straightforward. First,
Plaintiffs have alleged misrepresentations about the nature of
the ARS market itself and MLPFS’s support bidding practice. See
supra Part I.D. Those allegations, taken as true, are material;
Defendants’ assertion that the facts about MLPFS’s bidding
practices were properly disclosed is unfounded. See SEC Order
at 3. Moreover, these facts were pleaded with particularity:
Plaintiffs cited specific facts about MLPFS’s auction procedures
32
that were undisclosed at and after issuance. See supra Part
I.D.
Second, after the August Disclosure, it would have been
unreasonable to rely on statements made by MLPFS in the ways
advanced by LSED here. See Citigroup ARS, 700 F. Supp. 2d at
307. Therefore, any of the state-law claims in Counts Two and
Three are dismissed to the extent that they are predicated on
alleged fraud or misstatements that occurred after the August
Disclosure. See Abbott v. Equity Grp., Inc., 2 F.3d 613, 624
(5th Cir. 1993); Sun Drilling Prods. Corp. v. Rayborn, 798 So.
2d 1141, 1152-53 (La. Ct. App. 2001).
Third, the Court’s breach of fiduciary duty analysis, supra
Part IV.C, applies to supply a duty to provide correct
information. In addition, LSED and MLPFS had a contractual
relationship, which supplies such a duty in Louisiana. See
Barrie v. V.P. Exterminators, Inc., 625 So. 2d 1007, 1015 (La.
1993).
Fourth, all three of these claims require a showing of
reasonable reliance. See Sun Drilling, 798 So. 2d at 1153.
LSED adequately alleges reasonable reliance on pre-August
Disclosure omissions by MLPFS. When omitted information is
material, as here, reliance may be presumed. See Black v.
Finantra Capital, Inc., 418 F.3d 203, 209 (2d Cir. 2005); cf.
Falcon v. Bigelow-Liptak Corp., 356 So. 2d 507, 510 (La. Ct.
33
App. 1977) (res ipsa loquitur). To counter that presumption,
MLPFS offers only that the facts Plaintiffs claim were omitted
were in fact disclosed at the outset. That argument was
rejected by the SEC, see SEC Order at 3, and the Court draws the
same conclusion. Although the issuing documents indicated that
MLPFS could bid (Defs. Mem. at 20), those disclosures were
inadequate in light of allegations of (1) a pervasive support
bidding practice (2) necessary to keep the ARS market afloat.
SEC Order at 3.
These four propositions tacked down, the Court concludes,
accounting for Plaintiffs’ damages allegations, that Plaintiffs
alleged a claim for negligent misrepresentation.
The final question relevant to the remaining two claims
here is whether Plaintiffs adequately alleged intent.
Allegations of an “intent to obtain an unjust advantage or to
cause damage or inconvenience to another” suffice. Fenner v.
DeSalvo, 826 So. 2d 39, 44 (La. Ct. App. 2002). Plaintiffs
allege that MLPFS had a long-standing support bid practice that
predated the LSED issuance and was concealed from LSED, and that
MLPFS stood to gain additional profit from selling ARS products
over traditional bond products. (Pls. Mem. at 25; Compl. ¶¶ 70-
72, 174-182.) LSED argues that because the facts about the
nature of MLPFS’s bidding in the ARS market were solely in the
possession of MLPFS, there is no way it could have discovered
34
the truth ex ante. Cf. La. Civ. Code. Ann. art. 1954 (“Fraud
does not vitiate consent when the party against whom the fraud
was directed could have ascertained the truth without
difficulty, inconvenience, or special skill.”). Knowingly
selling an unwitting client an allegedly more profitable but
flawed financial product raises an inference of an intent to
obtain an unjust advantage. See, e.g., Shelton v. Standard/700
Assocs., 798 So. 2d 60, 65-66 (La. 2001). Indeed, Plaintiffs
allege that MLPFS’s compensation arising from the LSED ARS was
up to 5700% higher (over the life of the issuance) than an
underwriting transaction for a conventional bond. (Compl.
¶ 246.) Although Defendants correctly argue that a motive to
make a profit alone is insufficient to allege fraud (Defs. Mem.
at 22), that is not the allegation here. Instead, Plaintiffs
allege that Defendants had an intent to sell ARS because MLPFS
would earn greater, different fees than in a traditional
transaction, all the while knowing the ARS market was a sham.
(Pls. Mem. at 28-30.) That is enough to allege an intent to
defraud. See Abu Dhabi Comm’l Bank v. Morgan Stanley & Co., 651
F. Supp. 2d 155, 179-80 (S.D.N.Y. 2009); In re Global Crossing,
Ltd. Sec. Litig., 322 F. Supp. 2d 319, 345-46 (S.D.N.Y. 2004).
Given that Plaintiffs allege that these alleged
misrepresentations caused them damages, the above analysis
indicates that Plaintiffs have alleged a claim for fraud and
35
intentional misrepresentation arising from pre-August Disclosure
misstatements or omissions.
D. Count Four: Breach of Contract
Plaintiffs’ breach of contract claim is that MLPFS’s April
19, 2005, “Response to Solicitation for Offers for Senior
Managing Underwriter” (“Proposal”) was accepted as a contract
governing MLPFS’s alleged advisory role, separate and apart from
the later-signed written contracts. (See Compl. ¶¶ 30, 37, 232;
Pls. Mem. at 22.) Plaintiffs claim that the Proposal was
effectuated by “several ancillary agreements entered between
MLPFS and LSED that were component parts of MLPFS’s larger
obligation.” (Compl. ¶ 233.)
In order for a contract to be formed under Louisiana law,
“an acceptance must be in all things conformable to the offer.
An offer must be accepted as made to constitute a contract. A
modification in the acceptance of an offer constitutes a new
offer which must be accepted in order to become a binding
contract.” LaSalle v. Cannata Corp., 878 So. 2d 622, 624 (La.
Ct. App. 2004). Moreover, if “a proposal [is] to qualify as an
offer, it must reflect the intent of the author to give to the
other party the right of concluding the contract by assent.”
Delta Testing & Inspection, Inc. v. Ernest N. Morial New Orleans
Exhibition Hall Auth., 699 So. 2d 122, 124 (La. Ct. App. 1997).
Without this intent to make an offer acceptable by the offeree
36
as made, a proposal is “only an invitation to negotiate or an
expression of willingness to receive offers from others.” Id.
The Proposal was not meant to be accepted as a contract.
In response to LSED’s Solicitation, MLPFS’s Proposal provided
both a primary proposal (see Defs. Mem. at 20-24, Ex. D), as
well as a number of alternative options (see id. at 25-26).
MLPFS’s Proposal could not have been and, indeed, was not
“accepted as made.” LaSalle, 878 So. 2d at 624. That LSED and
MLPFS spent over five months negotiating written agreements
ultimately signed signals that MLPFS’s Proposal was not an offer
to be accepted by LSED. (See, e.g., Compl. ¶ 42 (“During these
five months [November 2005 to March 2006], MLPFS’s
representatives . . . were continually advising and making
recommendations to the LSED Restructuring Group about how the
borrowings should be structured.”).) Plaintiffs also contend
that the various presentations made by MLPFS supported the
creation of a separate contract or created the contract in and
of themselves. (See id. ¶ 59; Pls. Mem. at 22.) For the same
reasons that the Proposal on its own could not form a separate
contract, the presentations on their own or in conjunction with
the Proposal likewise could not form such a contract. See
LaSalle, 878 So. 2d at 624. The presentations do not provide
details sufficient to constitute an offer acceptable by assent.
See id.
37
In short, MLPFS’s Proposal was not an offer as it could not
have been, and was not, assented to in full. See id.
Ultimately, three related but independent written contracts were
consummated between the various parties. (See Defs. Mem., Exs.
E, F, G.) Plaintiffs point to no provision of any of the
written agreements MLPFS breached. Those agreements each
contained explicit integration clauses and represented the full
agreement of the parties after almost a year of negotiations
between the parties. To the extent Plaintiffs are asserting the
Proposal and presentations modified the final agreements rather
than formed a separate one, the Plaintiffs fail to point to
specific provisions of the final agreements that are ambiguous.
The parol evidence rule thus bars consideration of such
evidence. Condrey v. SunTrust Bank of Ga., 429 F.3d 556, 566
(5th Cir. 2005). Therefore, Plaintiffs’ breach of contract
claim is dismissed.
E. Count Eight: Breach of Warranty
Plaintiffs claim that MPLFS warranted that “the various
products that [MLPFS] sold as part of the structure that it
recommended were free from redhibitory defects and/or were fit
for their intended use to create a ‘synthetic fixed rate’
borrowing.” (Compl. ¶ 264 (citing La. Civ. Code Ann. art. 2520
(warranty against redhibitory defects); id. art. 2524 (thing fit
for ordinary use).)
38
To maintain a cause of action for breach of warranty
(called redhibition in Louisiana), the Plaintiff must show that:
(1) the seller sold the thing to him and that it is

either absolutely useless for its intended purpose or
its use so inconvenient or imperfect that had he known
of the defect he would never have purchased it; (2)
the thing contained a non-apparent redhibitory defect
at the time of sale; and (3) the seller was given an
opportunity to repair the defect.
Vincent v. Hyundai Corp., 633 So. 2d 240, 243 (La. Ct. App.
1993).
Louisiana does not apply the law of warranties against
redhibitory defects to intangible “things” such as the financial
structure at issue here. Guenin v. R.M. Homes, Inc., 424 So. 2d
485, 487 (La. Ct. App. 1982) (“The articles on redhibition . . .
refer only to ‘things’ (‘things sold’ and ‘inanimate things’)
and ‘animals.’”). This understanding of the “things” to be
warranted is further informed by what constitutes a defect.
Harper v. Coleman Chrysler-Plymouth-Dodge, Inc., 510 So. 2d
1366, 1369 (La. Ct. App. 1987) (“The term ‘defect’ . . . means a
physical imperfection or deformity; or a lacking of necessary
components or level of quality.”). The discussion of “physical
imperfection” or a lack of “components” supports MLPFS’s
position that the law warranting against redhibitory defects
applies to tangible items. See id. Plaintiffs assert that
their claim arises because the financial structure was “lacking
of necessary components or level of quality.” (Pls. Mem. at
39
40.) Yet Plaintiffs cite no authority for the proposition that
the warranty against redhibitory defects applies to intangible
“things.” Absent any Louisiana authority, the Court is
reluctant to expand Louisiana law by applying a warranty against
redhibitory defect to intangible products like those involved
here.
Additionally, the financial products here worked for almost
two years between the date of the bonds’ issuance and the
failure of the ARS market. Plaintiffs were aware of the alleged
“defects” and had the power to avoid these “defects” by
conversion to another “mode.” See supra Part III.B. Faced with
this choice, LSED opted to absorb additional risk and reap the
rewards of a lower interest rate by way of functioning swap
agreements and credit enhancement. The swap agreements and the
credit enhancement, at the time of the sale, were not
“absolutely useless for its intended purpose” or “so
inconvenient or imperfect.” Vincent, 633 So. 2d at 243. The
breach of warranty claim is dismissed.
F. Count Nine: Detrimental Reliance
Detrimental reliance is defined by statute in Louisiana.
“A party may be obligated by a promise when he knew or should
have known that the promise would induce the other party to rely
on it to his detriment and the other party was reasonable in so
relying.” La. Civ. Code Ann. art. 1967; Omnitech, 11 F.3d at
40
1329. The Court is loath to apply detrimental reliance in light
of its equitable nature and the Court’s holding with respect to
the fiduciary duty, misrepresentation, and fraud claims.
“Detrimental reliance is not favored in [Louisiana] law and is
sparingly applied as it bars the normal assertion of rights
otherwise present.” Hibernia Nat’l Bank v. Antonini, 862 So. 2d
331, 336 (La. Ct. App. 2003). Because the fiduciary duty,
misrepresentation, and fraud claims remain, Plaintiffs are able
otherwise to assert their rights. Id. Moreover, “[d]etrimental
reliance is [an] equitable remedy.” Hospitality Consultants,
LLC v. Angeron, 41 So. 3d 1236, 1242 (La. Ct. App. 2010). As
discussed supra in Part III.B, Plaintiffs had a hand in their
own demise when LSED refused to convert to a different “mode.”
Because detrimental reliance is an equitable remedy, the Court
concludes that the Plaintiffs’ actions weigh against allowing
this claim to remain. The cause of action for detrimental
reliance is dismissed.
G. Count Ten: Unjust Enrichment
To plead unjust enrichment in Louisiana, “there must be no
other remedy at law available to plaintiff.” Conerly Corp. v.
Regions Bank, No. 08 Civ. 813, 2008 WL 4975080, at *9 (E.D. La.
Nov. 20, 2008). Plaintiffs have multiple surviving causes of
action, including the fiduciary duty, misrepresentation, and
fraud claims, and therefore have other remedies available.
41
Moreover, it is not material whether the other claims are
successful, but rather that they exist. Id. Plaintiffs assert
that they are pleading their unjust enrichment claim in the
alternative, and, therefore, that it should be allowed to
proceed. (See Pls. Mem. at 41-42.) This argument has been
flatly rejected in similar circumstances. Conerly Corp., 2008
WL 4975080, at *9. Therefore, unjust enrichment is
inappropriate.
Finally, similar to the detrimental reliance claim, the
Court is disinclined to employ an unjust enrichment remedy.
Louisiana courts hold that unjust enrichment is an “equitable
remedy.” Hospitality Consultants, 41 So. 3d at 1242. The Court
therefore concludes that Plaintiffs’ actions weigh against
allowing an unjust enrichment claim to go forward. The cause of
action for unjust enrichment is dismissed.
V. CONCLUSION
For the reasons elucidated above, Defendants’ motion for
judgment on the pleadings [dkt. no. 35 in No. 09 Civ. 5404; dkt.
no. 28 in No. 09 Civ. 6770] as to Counts Four through Ten is
GRANTED; those counts are dismissed with prejudice as the
pleadings are closed. The motion is DENIED as to Counts One
through Three, although those claims may not be predicated on
post-August Disclosure alleged misstatement or omissions for the
reasons stated in Part IV.C., supra. In keeping with the
42
Court's state-law statute of limitations analysis, see supra
note 6, any state-law claims predicated on the nondisclosure of
the SEC investigation or the alleged conflicts of interest that
caused pre-August Disclosure damages are time barred.
SO ORDERED.
Dated: December 7, 2010

New York, New York
-~~
LORETTA A. PRESKA
Chief U.S. District Judge
43

In Re Merrill Lynch 12 07 2010

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Case 1:09-cv-06770-LAP Document 60 Filed 12/07/10 Page 1 of 43

UNITED STATES DISTRICT COURT

LORETTA A. PRESKA, Chief United States District Judge:

In this case, Plaintiffs, Louisiana Stadium and Exposition

District (“LSED”) and the State of Louisiana (collectively

“Plaintiffs”), allege ten causes of action against Defendants

Merrill Lynch, Pierce, Fenner & Smith, Inc. (“MLPFS”) and

Merrill Lynch & Co., Inc., (“Merrill”) (collectively

“Defendants”) related to Plaintiffs’ auction rate securities

(“ARS”) issuance. On February 8, 2010, Defendants filed a

motion for judgment on the pleadings against Plaintiffs. The

motion is GRANTED in part and DENIED in part.

LSED is a subdivision of the State of Louisiana, with

offices located in New Orleans, Louisiana. (See Third Amended

and Supplemental Complaint ¶ 15 (“Compl.”).) LSED owns the

Louisiana Superdome, and the State is the lessee of the

Superdome. (Id. ¶¶ 15-16.) When LSED’s expenses exceed its

revenues, the State “funds the . . . shortfall.” (Id. ¶ 16.)

Defendant MLPFS is a Delaware corporation with its

principal place of business in New York. MLPFS is a subsidiary

of Merrill and provides, among other things, underwriting and

brokerage services. (See id. ¶ 17; see also Memorandum of Law

in Support of Defendants Merrill Lynch & Co., Inc. and Merrill

Lynch, Pierce Fenner & Smith Incorporated’s Motion for Judgment

on the Pleadings (“Defs. Mem.”) at 16.) Defendant Merrill is

also a Delaware corporation with its principal place of business

in New York and is the parent company of MLPFS. (See Compl.

B. Auction Rate Securities

The following facts are recited as alleged in the complaint

and are regarded as true in considering this motion for judgment

Cir. 2010). All reasonable inferences are drawn in favor of the

S. Ct. 1937, 1949-50 (2009).

ARS are long-term variable-rate debt instruments that are

traded at periodic Dutch auctions, which are normally held every

seven, fourteen, twenty-eight, or thirty-five days. (Compl.

¶¶ 6-7.) At a Dutch auction, buy orders are entered at interest

rates selected by the bidder. (Id. ¶ 5.) Orders to buy or sell

ARS at an auction can only be placed through a designated

broker-dealer. (Id. ¶ 6.) The broker-dealers collect the

orders and forward them to an auction agent who administers the

Dutch auction. (Id.)

These auctions dictate the interest rates payable on the

ARS. (Id. ¶ 5.) Each bid, or buy order, is ranked by the

auction agent from lowest to highest based on the interest rate

lowest interest rate, followed by orders with progressively

higher interest rates, until all instruments available for sale

are matched up with purchase orders. (See id.) The lowest

rate following an auction. (See id.) If, at a particular

auction, the buy and sell orders are insufficient to purchase

In the event of an auction failure, ARS holders are unable to

ARS rises to the maximum rate (or failure rate) of approximately

market had grown to approximately $330 billion in outstanding

securities. (Id. ¶ 8.)

C. The Solicitation and Agreement

In early 2005, LSED sought to restructure its existing

debt. (See id. ¶ 28.) Subsequently, LSED issued a

“Solicitation for Offers for Senior Managing Underwriter” (the

“Solicitation”) seeking investment banking services. (Id.

¶ 29.) After receiving the Solicitation, MLPFS responded by

submitting a proposal to LSED on April 19, 2005. (See id.

¶ 30.) In its proposal, MLPFS stated, among other things, that

it would “provide a full spectrum of client services . . . in